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Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare?

Author

Listed:
  • Duarte Brito

    (Universidade Nova de Lisboa and CEFAGE-UE)

  • Pedro Pereira

    (Autoridade da Concorrência and IST)

  • João Vareda

    (Autoridade da Concorrência and CEFAGE-UE)

Abstract

We investigate if vertical separation reduces non-price discrimination and increases welfare. Consider an industry consisting of a vertically integrated firm and an independent retailer, which requires access to the vertically integrated firm's wholesaler services. The wholesaler can degrade the quality of input it supplies to either of the retailers. Discrimination occurs if one of the retailers is supplied an input of lower quality than its rival. We show that separation of the vertically integrated firm reduces discrimination against the independent retailer, although it does not guarantee no-discrimination. Furthermore, with separation, the wholesaler may discriminate against the vertically integrated firm's retailer. Vertical separation impacts social welfare through two e¤ects. First, through the double-marginalization effect, which is negative. Second, through the quality degradation effect, which can be positive or negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous.

Suggested Citation

  • Duarte Brito & Pedro Pereira & João Vareda, 2011. "Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare?," CEFAGE-UE Working Papers 2011_06, University of Evora, CEFAGE-UE (Portugal).
    • Handle: RePEc:cfe:wpcefa:2011_06
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    File URL: http://www.cefage.uevora.pt/en/content/download/2366/31772/file/2011_06.pdf
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    References listed on IDEAS

    as
    1. de Bijl, P.W.J., 2004. "Structural Separation and Access in the Telecommunications Markets," Other publications TiSEM 32723d69-2d9b-41fe-8369-9, Tilburg University, School of Economics and Management.
    2. P.W.J. De Bijl, 2005. "Structural Separation and Access in Telecommunications Markets," Competition and Regulation in Network Industries, Intersentia, vol. 6(2), pages 95-115, June.
    3. Kai-Uwe Kuhn & Xavier Vives, 1999. "Excess Entry, Vertical Integration, and Welfare," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 575-603, Winter.
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    Cited by:

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    2. Howell, Bronwyn, 2014. "Structural Separation and Technological Diffusion," Working Paper Series 4353, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Ben Dkhil, Inès, 2014. "Regulation and Investment in Telecom Network Infrastructure Facilities: The Recent Developments and Debates," MPRA Paper 72910, University Library of Munich, Germany, revised 02 Feb 2015.
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    5. Howell, Bronwyn, 2014. "Structural Separation and Technological Diffusion," Working Paper Series 19314, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

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    More about this item

    Keywords

    Vertigal integration; Vertical separation; Non-price discrimination.;
    All these keywords.

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